Performance Review: 2018's Realized Returns

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Includes: ASYS, BWA, CLDT, CRWS, DDD, DLTH, FMC, GILD, HWKN, MYL, OMI, POWL, PZZA, SIG, SPY, TWIN
by: Cory Cramer
Summary

This article reviews the individual long ideas I shared on Seeking Alpha that were realized in 2018 and compares them to their benchmarks.

It discusses my four-year journey writing for SA.

And the article reviews the aggregated performance of all the realized ideas I've shared on SA since 2015 and compares them to their benchmarks.

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Introduction

2019 will mark the fourth year I've shared my investing ideas on Seeking Alpha as a contributor. From the outset, I knew that I wanted to (1) share ideas and strategies that produced alpha (alpha being defined as outperforming the S&P 500 or an explicit alternative investment discussed in the article), (2) measure the performance of those ideas for better or worse, and, if an idea underperformed or failed, then I wanted to closely examine and discuss why it might have failed, (3) Avoid writing repetitious updates on individual stocks I had already written about if I didn't have something to change, add, or discuss regarding the idea. I also decided to include suggested portfolio weightings for my ideas so that readers had some sort of idea how much confidence I had in one idea compared to another, and what sort of portfolio risk I thought was appropriate for the idea and strategy I was proposing.

I decided to do these things because I was a reader of SA articles well before I became a contributor. As a reader, I developed several pet peeves that I didn't want to do as a writer. I really hated it when an SA writer would publish a long idea for a stock, have that stock fall very far from the price they suggested it was a good buy, and then claim that if investors just hold on for the long-term or collect the dividends that they would be fine. In fact, often these writers would suggest that readers should buy more of the fallen stock since the price was now lower. This sort of thinking, while convenient for a writer who suggested a stock at too high of a price, doesn't work well in the real world. What if a reader was fully invested after their initial purchase? How could they buy more when the stock fell? The answer is, they couldn't.

In addition to that peeve, I would observe a few authors on certain popular stocks write a 'buy' article on them every month, when the price fell they would tell everyone to buy more, and when the price rose, they would cherry-pick the one month they happened to write their 'buy' article while the stock was low, and then claim how brilliant they were to recommend the stock while it was a good value. I didn't want to be one of those writers. So, I adopted several policies for myself as a writer on SA. First, I would put a maximum 5-year average time horizon on my ideas. If my idea didn't work out by then, it would be declared a loser and I would write about why I was wrong. (And I've stuck to my stated time-horizons, as we'll see with the awful Gilead idea I wrote about in 2016). I also only wrote performance reviews at the end of a quarter, or when I was selling a stock. I might write a follow-up once a year if there was something interesting to add, but I would always have some sort of guidelines in place for those. For example, with my "How far could they fall?" articles, I wrote two monthly updates that covered all 28 stocks each month, a follow-up if an individual stock fell more than -20%, and announcement if I was currently buying the stock or a declaration that the rotational trade was over. I never cherry-picked updates and wrote full updates on them. The tracking articles always started with the publication date of the original article and ended with the last day of the most recent month. With my unrealized long positions that I might be holding for up to 5 years, I might check in on them once a year if I have something interesting or useful to write about, but no more than that. For example, I wrote a follow-up on Mylan (MYL) about margin of safety, and one on Signet Jewelers (SIG) about being disciplined. Both have been long-term underperformers that I had held for over a year or two and continue to hold. In total, I currently only have three stock ideas on SA that have been running longer than a year, the two mentioned above, and Powell (POWL), so I don't really have many ideas that have taken an extremely long time to play out.

In a perfect world, I would have a live real portfolio where my ideas could be tracked more easily. Unfortunately, my family's investments are spread out among a 401k, a Roth, a taxable account, and my two kids' accounts, and about 60% of the funds are in the 401k, which I can't use to buy individual stocks. So far, since 2016 I have personally been long every individual stock idea I've written a 'buy' article on. I plan to continue that tradition as long as I have cash outside the 401k to invest. However, I don't have a big enough portfolio outside of the 401k to guarantee that in a recession scenario I wouldn't become fully invested outside of the 401k before my recommended portfolio weightings reach 100% (right now the unrealized positions total a 31% weighting). Going forward over the next few years, I hope to have enough money in an individual account outside the 401k to run a real live portfolio. It would make my life a lot easier in terms of tracking performance. But until then, what I'm doing today will have to suffice. I've tried to the best of my ability to make it honest, fair, and accurate.

Previous years

Before we get into 2018, let me first explain that the ideas covered in this article are only my 'realized' ideas, meaning I first wrote a 'buy' article, followed by a 'sell' article. They don't include my unrealized ideas, which I will write about in my next article, or my rotational idea performance, which I wrote about in this article. Though, at the end of the article, I'll include what the performance would have been with the rotational ideas included, too.

2015

2015 was the first year I started writing for SA and I was still figuring out what sort of writer I wanted to be and how to go about writing investing articles. I only wrote for the last three months of 2015, but I did have 3 realized ideas that returned +8.70% vs. the benchmark's +0.22% if the investments were bought and sold at the same time as the benchmark. Those investments carried a 14% weighting.

2016

2016 was the year I started writing about cyclical ideas and exclusively about long ideas. That year I had 8 realized ideas that returned +15.07% vs. the benchmark's -1.13%. Those ideas carried a 19% total weighting.

2017

I wrote very little for SA in 2017. The market was high, and being long-only I wasn't finding much to write about. I did, however, take profits on 3 cyclical value ideas that year with a 3% total weighting: Amtech Systems (ASYS), FMC Corp. (FMC), and Twin Disc (TWIN) for an average return of +102.93% vs. +19.96% for the benchmark.

So, my first three years, I managed to have my realized returns beat the S&P 500 or declared benchmark each year. Things would not go as well in 2018 due to a single bad investment, but I think there are some lessons many can learn from.

2018 Performance

2018 saw me realize the worst investment idea I've written about on SA, Gilead (GILD), which I wrote a brief, one paragraph idea about in January of 2016, declaring the company would make an acquisition within 2 years that would cause the stock price to go higher. Also in the same article, I suggested Crown Crafts (CRWS). They were both part of my 'Picks for 2016' article. I didn't do a full write up on either one of them, but I had already been long both stocks in my own account from before I started writing for SA, and for 2016 I had decided that going forward I would only write long ideas that I was long myself in order to align what I was writing with what I was actually doing myself (before that I had written about short ideas as well). Gilead turned out to be the worst investment I had ever written about, and to make matters worse, I weighted it 6%, which was higher than any other investment idea I would ever write about after that. (Soon after that article, I would begin writing about cyclical investing where most of my weightings would be 1-2%.)

After only a few months had passed, I knew I made a mistake with Gilead, and I wrote an article about it titled "My Gilead Mistakes". I knew then that even if the stock recovered within my 2-year time frame that I had bought Gilead without enough margin of safety and had weighted the idea far too heavily (especially since I was lowering the weightings of my future investments and ideas). Nevertheless, I held on until my two-year time horizon was up. Here is how both Gilead and Crown Crafts did from January 2016 to January 2018 compared to the S&P 500 (SPY):

Chart GILD Total Return Price data by YCharts

Crown Crafts was essentially even, but underperformed SPY by -40%. Gilead lost -20% over the same time period. To make matters worse, Gilead was weighted much heavier than my future ideas would be. It was going to take a lot of winners in order to make up for this one loser. Crown Crafts was weighted 4%, which wasn't great either on a 40% underperformer. Fortunately, these were two of only three negative realized ideas I've had on SA.

Next, let's move on to the rest of my ideas that were realized in 2018.

Way back on December 14th of 2015, I wrote an article "Selecting a REIT from the Top Down" in which I suggested that Chatham Lodging Trust (CLDT) was a good buy with a 2% weighting, and then closed the idea on February 2nd, 2018 when I decided to focus almost exclusively on cyclical investing. I also wrote another article on Chatham and LaSalle January 19th, 2016, where I suggested Chatham was better than LaSalle and that LaSalle owners would be wise to rotate into Chatham even though I wasn't adding to Chatham at the time. It's situations like this where tracking one's results gets complicated. While in my first article I didn't explicitly say that I was dealing specifically within the REIT universe, in my mind, that's what I was doing, so Vanguard Real Estate ETF would be an appropriate benchmark. Chatham outperformed that benchmark:

Chart CLDT Total Return Price data by YCharts

(But it wouldn't have outperformed the S&P 500 over this time period.)

Additionally, Chatham didn't outperform LaSalle over the time period of my second article:

chatham lodging At the time, I had only been writing for SA a few months and even though I was dedicated to tracking performance, I didn't fully appreciate complications like this. After reviewing the articles, for tracking purposes, I have decided to split the difference and divided up my original 2% Chatham weighting, into 1% vs. LaSalle and count that as an underperformer from the time of that article, and 1% vs. VNQ from the time of the original 2015 article. This seems fair and matches my original intentions of the articles.

After I had cleared the decks and sold these very early ideas in January of 2018, the only non-cyclical idea I still had running in 2018 was Duluth Holdings (DLTH). I wrote two separate bullish articles on Duluth in 2016. One was an outperformer, and one was positive, but underperformed.

dlth dlth2 I explain both of the investments in my article "Taking Profits in Duluth Holdings" in September of 2018.

With the selling of Duluth, all of my non-cyclical legacy ideas I had written in my first six months of writing for SA had been realized.

Cyclical Ideas

Most of the readers of my work on SA know me for my writing of cyclical ideas and strategies. I began researching cyclical investing in late-2015 and began writing about investing in cyclical ideas in February of 2016. The first cyclical idea I wrote about was BorgWarner (BWA) in my February 10th, 2016 article "It's Time To Switch Strategies". It had a 1% weighting. I eventually sold BWA and realized that idea on January 12th, 2018, just a few days before I published my first "How far could they fall?" article. I wanted to use it as an example of why it's prudent to take profits when the risk/reward was unfavorable because I knew I was about to get a lot of pushback from readers for the "How far could they fall?" series I was preparing to write. Here is how BWA performed while I held it:

Chart BWA Total Return Price data by YCharts

Interestingly, here is how it has performed since I took profits:

Chart BWA Total Return Price data by YCharts

So, BWA was my fourth cyclical success.

I had another cyclical success that was realized in 2018, 3D Systems (DDD). I first wrote about on January 8th, 2018 in my article "3D Systems is in Cyclical Value Territory" with a 1% weighting. And I realized this idea on August, 9th, 2018 with my article "3D Systems: Taking Profits In Another Cyclical Winner".

Chart DDD Total Return Price data by YCharts

Those were the only two cyclical value stocks I realized in 2018, but there was one acquisition cycle stock that ended up being the article that I was most proud to have written in 2018: "Owens & Minor Inc. Is Cheap, But This Alternative Is A Better Value". In that article, I warned investors away from Owens and Minor (OMI) and suggested they buy a 1% weighting in Hawkins (HWKN) instead. Here is how they performed from the publication of that article until profits were taken in Hawkins this December:

hawkins My last realized idea in 2018 was Papa John's (PZZA). Long story short, on January 11th, 2018 when I first wrote about Papa John's, I thought the controversial founder was stepping aside and would no longer be the face of the company and that on a relative basis, the stock was undervalued. It turned out that the founder had no intention of remaining in the background and continued to embarrass the company, so I sold for a loss.

Chart PZZA Total Return Price data by YCharts

I ended up taking a -14.2% loss with a 1% weighting on Papa John's this year.

Conclusion

Most of my writing in 2018 was actually not on the long side, but on the bearish/defensive side, where I warned investors about the downside of many stocks, and that project was a tremendous success. In terms of the individual long ideas that were realized in 2018, though, the results were much more mixed. I had a lot of legacy ideas that carried into 2018, including the only 3 realized ideas out of 24 total that produced losses. My final winners vs. losers tally since I started writing for SA is 21 profitable ideas vs. 3 unprofitable ideas and 17 ideas that outperformed the benchmark vs. 7 that underperformed.

The total ideas realized in 2018 carried an 18% weighting and returned +12.02% vs. the benchmark's +32.30% if bought and sold at the same time. If we combine all of my realized ideas since I started writing for SA, mine have returned +17.28% vs. +11.54% for the benchmarks with the same weightings. I think that's respectable, but I expect to perform better going forward after learning from some of my mistakes along the way. The single mistake I made on Gilead really tilted the performance in a negative way. If Gilead wasn't included, for example, on the whole, my ideas would have returned +22.01% vs.7.89% for the benchmark. That's how damaging an overly weighted mistake can be. And I hope other investors take note of that and perhaps avoid that mistake themselves.

I have no problem letting a good investment grow into an outsized portfolio position over time, but I think over-sizing positions from the outset is risky. The truth is, I lost a lot of money on Gilead personally because I did have an overweight position in it in my personal portfolio, and it did have an outside negative effect on my wealth. And that doesn't make me happy. I know that a lot of investors have had some big losses they've taken this year with the bear market we have recently experienced. My hope is that this performance review serves as an example that it's possible to bounce back from a pretty big mistake. Even with a pretty darn bad investment, I was able to outperform the benchmarks by over 5% over the past 3 1/4 years and return an average 17% on my ideas. So, keep battling if you took some losses this year. It's possible to make up for them over time.

This article only covered my realized ideas that involved individual stocks. As many readers know, most of my time this year was spent warning investors about the dangers of various stocks and suggesting they rotate into defensive ETFs. As I discussed and reviewed in my December 31st article, 14 of those rotational ideas were completed this year. The average realized returns for the defensive alternatives I suggested in 2018 was +3.43%, the S&P 500 -6.43%, and the target stocks -24.35%. If we assume a 2% weighting for each of those defensive ideas that were realized in 2018 vs. the target stock benchmark, and combine that with the individual long ideas I covered in this article, all of my realized ideas from 2018 would have returned +6.79%, while the benchmarks would have returned -2.18%. In some ways, these combined totals give a fuller picture of all the completed ideas that have produced profits or losses in 2018 vs. their benchmarks because it includes my general defensive posture throughout the year.

In my next article, I'll cover my unrealized ideas that are still running. I haven't calculated the exact returns yet, but it looks like they are going to carry about a 31% portfolio weighting and be double-digit negative as of the end of the year. As a whole, I'm very pleased with the results of my SA ideas, and I've learned a lot from tracking them. I know I'm a better investor than I was when I started in 2015, and I hope to continue improving in the future.

Disclosure: I am/we are long MYL, POWL, SIG, ASYS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.